Ian Cowie was named Consumer Affairs Journalist of the Year in the
London Press Club Awards 2012. He has been head of personal finance at
Telegraph Media Group since 2008, having been personal finance editor
since 1989. He joined the paper in 1986. He is @iancowie on Twitter.

Why won’t regulators act to end the multi-billion pound scandal of widows without pensions?

Hundreds of thousands of women will die in poverty during the decades ahead because of an irrevocable financial mistake their husbands have made or are about to make.

This is a scandal which many people in the City know about but which generates billions of pounds profit for insurance companies, so those in the know have good reason to keep quiet.

Worse still, financial regulators know about it, too, but are in no rush to act. When I asked the new lot at the Financial Conduct Authority why, there were some vague indications about consultation later this year. Talk about a cosy cartel with vested City interests and sleepy regulators remaining as thick as thieves while consumers remain out of sight and out of mind.

Unlike most other investments, annuity purchase is irrevocable; you cannot change your mind after the cooling off period has expired. It’s also one of the biggest financial decisions many people ever make because only 25pc of any pension fund can be taken as tax-free cash at retirement and the other three quarters is usually invested in an annuity.

So, as things stand, most married men are buying annuities which will leave their widows without a penny when they die. And most husbands do die before their wives because male life expectancy is lower than females’. Nor am I banging on about a niche market. Even now, according to the Association of British Insurers, about 400,000 people a year invest more than £11bn in annuities.

The insurer explains that this is not done maliciously but because “54pc of consumers don’t know what a joint annuity is”. The fact that the take up of joint annuities is so much lower at younger ages may suggest another explanation. Annuity yields are lower the younger you are at purchase because you are likely to receive more annual payments. Many husbands are buying single life annuities because they have saved too little to fund retirement and are desperate to boost their initial pension, whatever the consequences for their widows.

Hard to believe? Some experts, including Ros Altmann a governor of the London School of Economics, reckon the problem may be even bigger than I have reported. She told me: “If married men buy direct from an insurer, with no financial adviser, more than 80pc buy single life. It is very difficult to get accurate figures as the annuity companies seem very reluctant to release them.

“Annuity companies often claim that nearly half of married men buy spouse protection. But that is a highly misleading figure, because what they call ‘spouse protection’ is not a joint life annuity, it could be just a five year guarantee. Nowadays, as annuity rates are so low, a 65 year old man would be paid 5pc of his pension fund each year.

“That means a five year guarantee gives him just five times 5pc of his fund, which is only 25pc. So, after a lifetime of saving, his widow would not benefit from most of his fund unless he takes a joint life annuity. The guaranteed period does not work as proper protection.”

Specialist annuity advisers claim recent regulatory changes have actually made the problem worse. Alan Higham chairman of Annuity Direct said: “The retail distribution review has increased the number of people buying an annuity without taking financial advice and more married men buy single life annuities when taking no advice than when advised.

“At Annuity Direct, where a man wants to buy a single life pension, we give him a telephone call to check that he is aware that he is aware of what he is doing before implementing his choice online.

“We find that 40pc of married man who receive this call did not realise that they have chosen the single life pension online. It is part of our safety checks that seek to prevent members who buy online without advice from making a serious mistake. Research shows that around 50pc customers do make at least one serious mistake”

Similarly, Tom McPhail of Hargreaves Lansdown, said: “We ask every married client to sign a declaration confirming that they have discussed death benefits with their partner. We also give them a range of quotes including single and joint life and generally this helps to illustrate how little the additional cost of a joint life annuity is.

“For example, a 65 year old with no enhancements could get a single life level annuity of £5,783 or a joint life annuity – paying 50pc spouse’s pension – of £5,257 with a purchase price of £100,000.

“Some people will simply opt for the higher starting income but if their spouse were to outlive them by say 10 years – which is not uncommon – then the extra £2,628 per annum over those 10 years could make a huge difference to their quality of life.”

Put another way, in this example, the married couple who accept about £500 a year less initial income from a joint annuity could gain an extra £26,000 in widow or widower’s pension.

Why have the regulators failed to act to end this scandal? There is already a statutory duty to provide widows’ and widowers’ benefits for members of defined benefit or final salary schemes. That’s the type of pension all MPs and most regulators enjoy. That may also explain why nothing has been done to date about the scandal of widows without pensions in the private sector.

There will be a massive row about this in three years’ time when fewer victims of this multi-billion pound scam are able to avoid destitution with state pensions based on their spouses’ NICs. I hope that reporting this complex but important problem now will mean readers can avoid being affected directly.